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MS. SMITH: Now we are ready for questions. If you have on a tie, it's going to work against you. Questions will be directed primarily at the people on the stage. We are going to run this until about 9:00, and then we'll break for some more networking.

AUDIENCE MEMBER: Hi. My name's Raj Khera. I run a company called GovCon. It's a pretty popular Web site for government contractors. We started about a year and a half ago, and we had maybe 100,000, 200,000 hits a month and we are up to three million a month now. My question is, how do you know when you are ready for venture capital? We are doing okay. I don't know if we need to get it. But I'm curious to hear your response.

MR. HELLER: Let me start by saying, rather than knowing when you are ready for venture capital, I think the first question should be "do you need outside capital?" My advice would be to wait as long as possible to get outside capital, because we want your valuation to be as high as possible and, obviously, the longer you're in business doing well, the higher the valuation. So I think that would be step one.

MR. MORINO: From day one the total amount of money we had in our company was a thousand dollars. When we went public we had millions of dollars in the bank. If you don't need the money, don't go for it—unless it's a way of getting a superb partner. When we went out, we started literally with a thousand dollars, only because we had to clear the books. There was no money invested in the firm. It was all bootstrap. In fact, the only reason we went public—we did not need the cash—we needed the currency to do acquisitions. There was no need for the cash in our business. We were cash rich for quite a while.

MR BURTON: I think there are a couple of reasons why you might consider outside capital. BST, my company, was similar to Mario's in that we did not bring in venture capital for working capital. The first VC's we brought in were to take their money to buy another company. I would say that the reason to have venture capital is if you're constrained in your growth, number one, or number two, if you find somebody that you really believe can help you network and further your cause, and the cost to have them do that is a piece of your company, and that gets into relationships. I would suggest you merchandise yourself and look for money, and when you need money, you'll be ready. You'll have primed pump, so to speak. But I would not rush into it for the sake of having a VC on your board and their glamour.

MS. SMITH: Any additional comments, Suzanne?

MS. HOOPER: Don't wait too long. Don't go out looking for venture capital when you have $100,000, because you won't have a good negotiation point.

MS. SMITH: Did you hear what Suzanne said? Don't wait until you are down to your last dollar.

MS. HOOPER: Yes, don't wait until it's too late. If you have a little money in the bank or you are about to run out and try to negotiate with venture capitalists, you don't have a very good stand. So you need to raise it a little bit earlier than you need it.

MS. SMITH: I will add one thing. I have been to a couple of venture capital conferences recently, and have sat in on a couple of planning meetings for the MAVA conference. It's clear that the companies that get to present largely will be institutionally backed, and I do think that there is a positioning and PR element at some point that people ought to consider.

AUDIENCE MEMBER: If anyone still wants to be an entrepreneur after hearing this, I guess you're really determined. But one of the things that a lot of entrepreneurs really, I think, are concerned about as they go to get money—especially the last couple of years in a sort of overheated market—a lot of people are thinking about how they are going to move on and move out of that business. Should entrepreneurs be concerned about that or is that just a funding source?

MR. STEIN: I think that one of the things that I said was remember that the venture capitalists want to get a good return on their money and the only way they get a good return on their money is if they have a way of turning equity in your company into money. So I think the extent to which you should think about exit strategy is that an investor is to be your partner for a long time. What you ought to have in mind is how is he going to turn this work into money. That's the point of view, I would think about it from.

MR. BURTON: I'd add one comment. If you're building a company, you're doing it as a long-term endeavor, and the thing to keep in mind—which has changed, at least briefly—the way to create an exit strategy is to create a company that makes money. If a company makes money, you will have multiple opportunities to exit that company with somebody buying you, somebody taking a piece of it. But companies are built to make money, and that's the thing that you have to remember, and that takes a long time. If you put the exit strategy before making money, you have a high probability of failure.

AUDIENCE MEMBER: You've all said that it takes a good bit of time to obtain financing, for startups, to get money to get your company going. But in this very fast-paced new environment we all seem to be working in, what can one do in order to get money quickly so that the competition doesn't beat you out, if you're a small company.

MR. MAY: The main thing is to be as creative as possible, to network with as many of your peers who have been through this, mentors. You cannot assume that venture capital alone, the big V big C, is available. It is a very small tip of the iceberg and you have to look at all the other funding opportunities and be working on them at the same time. So whether it's angels, whether it's suppliers, whether it's your friends and family and a second trust, you cannot wait for the answer from the stack that's on the desk until you go to the next—you should be going parallel tracks at all times and trying to find out who in the community is finding what creative sources, and then tap into those yourself. But never assume that what was used five years ago or what the venture capitalists want is the only way to go.

AUDIENCE MEMBER: I have a tie on, so I apologize for the tie. I'd like to get comments concerning the use of venture capital to acquire other companies. My operation has acquired two companies, but we need about three more that we've eyeballed to crush the competition. We need cash to acquire these companies. There's a lot you can do with equity but you can't do it all with equity. So I'd like comments from the investment group and advisors on how do you go about getting the money to buy others—we have to buy them in order to make some real money.

MR. MAY: Just as an aside, what you're describing to me is this phenomenon we're getting in the community of merchant bankers and investment bankers. Venture capitalists are patient money. They want to grow companies. In general, they are doing this over a three-to-five year period for their limited partners. In this community we haven't had that much M &A, investment banking, merchant banking, which is coming into this area in droves. Carlyle, Thayer, you name it. There are a number of opportunities, special funds to look at opportunities as opposed to long-term capital, you may want to look at that as well.

MS. SMITH: Frank Tower, do you have anything to add to that?

MR. TOWER:, John makes a good point that you've got to pick the right partner and it is going to be a merchant bank or an investment bank that's going to help you. But as you are putting your plan together, feel free to chat with a commercial banker or a merchant banker and find out how much would he be willing to take a piece of this, because it is going to be a mix of debt and equity, and you're very rarely going to find an equity player to take the whole thing or a debt player to take the whole thing.

MS. SMITH: I think our networking session would be a good chance to get some follow-up on that.


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